Beware the consensus

The world’s stock markets are in fine fettle and mere irritations like the euro zone debt crisis or a possible slowdown in the economic recovery probably won’t get in the way.

That’s the headline message from Thursday’s Reuters poll of 300 strategists, brokerages and wealth managers, including some of the world’s foremost experts on stock markets.

But before ringing your broker to scream “buy!” down the phone, there are some fairly big caveats to digest regarding this poll – not least the fact that the consensus view from our respondents has been very wrong in the recent past.

In 2008, they didn’t foresee how far major stock indexes would fall as the global financial crisis took hold (or in many cases, foresee any fall at all), nor did they predict the strength of the spectacular rally of 2009.

Also, the range of forecasts in the latest poll was conspicuously wide, signalling a high degree of uncertainty. For S&P 500 predictions at the end of 2010, our lowest forecast was 850 and the highest 1,375 – a 500 point difference. For the mid-2011 forecasts, the range was even wider at 750 points against 1,400.

While our poll respondents were right to single out recent robust corporate earnings as a key pillar of support for stocks, there was little mention of a nagging feeling that the global recovery will run into sand later this year as fiscal austerity measures in many Group of 20 countries bite.

If our polls have shown anything over the last couple of years, it’s that if things are going to tail off, they’ll probably tail off more than our consensus of experts usually says.

In my opinion, the people telling others to buy are making money on the transactions. I think the economy is pretty anemic and the US is still mired in two wars that are sucking the blood out of the country. I don’t see new products jumping off the shelf, or the new car dealer prep areas with long waiting lists. I also believe that the US government is about to wake up to find that deficit spending will not work on this side of the ocean either.

There is one thing that forecasting the weather and stocks have in common – they are nonlinear systems…even with a treasure trove of data, you can’t reliably forecast the weather beyond 7 days as the noise is too prominent.

The same applies to markets – it is an educated guess, not a failure of those polled.